I have come across a lot of individuals who have been the victims of the financial losses owing to stock trading. And their common fixation to explain their losses is to blame the markets.
Sorry! But that’s not the correct thing to do. The problem lies at the investors end as well and to prevent any future mishaps, we need to understand the problem and take the responsibility.
There is something about the stock markets that attracts and fascinates a lot of individuals and compels them to try their luck at the bourses. It’s almost like the Hollywood dream that a lot of youngsters live with. Though both of these dreams are different in several ways, the key motivation behind these dreams is big money and that too the quick one. The overwhelming perception that the individuals have about the markets is that of a dollar printing machine, thanks to the marketing gimmicks of brokers. To top that movies based on Wall Street themes have further added glamour to the markets.
The basic human psychology of herd mentality supplemented with all the above discussed factors lead to unprepared individuals burning their hands. And this, in turn results into frustrated traders with heavy losses blaming the markets for the mess they are into.
Being a financial market professional, I feel that the reaction of people biased towards blaming the markets for the losses is not completely justified. I am not here to play the blame game here, rather I would like to help you in understanding the basics and the checklists that are must before you enter the stock markets.
Basically stock markets are a place where shares of various public companies are bought and sold. The purpose of stock markets is to provide a market place for shareholders to trade their ownership in the firms. Remember that owning a stock makes you the part owner of the firm and thus you are effectively buying a business.
Now there are two basic categories of individuals who participate in the markets. These are day traders and long term investors. Investors enter the markets for longer duration and they generally look for dividend income and long term capital gains. They invest in the growth prospects and profitability of companies. This can also be achieved by some indirect and more professional methods of investments like via mutual funds, ETFs etc.
Day trading refers to buying and selling of stocks on intraday basis. This is where the real risk lies. This can be very rewarding but at the same time highly risky. And if you don’t have the risk appetite you should avoid putting a large part of your hard earned savings into day trading.
In fact the best way for wealth building is to go for mutual funds or ETFs and have patience. It’s not that day trading is a complete negative territory but for small investors and misguided individuals, I would suggest keeping one’s expectations practical and grounded. Even if allocate some of your portfolio to day trading or short term trading, make sure you follow strict stop loss and other measures to keep your losses within your appetite.
It’s in the best interest of the investors to do their research, understand the involved risks and then take the leap. It’s better to be prepared and well informed rather than blaming the markets. If the bee stings you, it’s not the fault of the bee hive. Use proper precautions and you are sure to enjoy the honey.